Cassini Died For Macro Fund Managers’ Sins

Cameron Crise – a former “swashbuckling” pirate, who now writes for Bloomberg and who is definitely notenamored with Mark Cudmore’s take on the dollar – is out with his latest daily missive and what he wants to do on Friday is compare failed macro fund managers to the Cassini spacecraft which careened into Saturn’s atmosphere at about 78,000 mph on Friday morning.

Mostly, the piece you’ll read below is what happens when the search for compelling story ideas during a Friday afternoon session devoid of news proves fruitless. But there are some decent observations about how managers shouldn’t become so wedded to a thesis that they allow themselves to lose all kinds of money while waiting for it to play out.

“When you see a 350-page slide deck justifying a losing position, it makes sense to wonder whether even a fraction of the effort that went into its creation was allocated to considering whether the investment thesis is misguided,” Crise writes.

Duly noted – as are the bits you’ll read about how, after a while, your investors won’t care whether you are “right” to insist that the market is “wrong” if your being “right” is losing them money.

That said, I’m not sure the Cassini comparison makes much sense.

For one thing, Crise imagines that “NASA’s Cassini satellite crashed into the surface of Saturn on Friday.” Saturn doesn’t have a “surface.” It’s just churning gas and liquid.

Also, Crise says that “fund managers [who forget] that the ultimate goal is to make money for investors [and] not to have some grand thesis being proved correct … may find themselves going the way of the Cassini probe.” The problem there is that fund managers who forget to make money have failed. Cassini, on the other hand, was sentenced to death precisely because it succeeded. See, Cassini figured out that Saturn’s moons might be habitable. So when the craft ran out of fuel, NASA couldn’t risk letting it float around up there lest it should accidentally get knocked into Titan or Enceladus and end up contaminating an alien world with Earthling microbes.

So you know, it’s difficult for me to see how fund managers who fail to make money for investors are like a spacecraft that has discovered potentially habitable moons in our solar system and in the process ensured that it must be sentenced to death by disintegration in an atmosphere where the pressure is strong enough to turn gas into liquid.

Cassini’s goal was to figure stuff out. It was so successful in that regard that it had to die. A fund manager’s goal is to make money for investors. If they fail to do that, they have to die too, only not because they have become a victim of their own success by discovering moons we might be able to live on in the future, but rather because they have become “victims” of their own failure assuming of course that it makes sense to call someone a “victim” when they have failed.

If you want to compare Cassini to fund managers, you might say something like this: it’s possible to have too much AUM, so funds can, like Cassini, become victims of their own success. If that’s the rout you want to go then fine, and extending the Cassini analogy, here’s what the deliberations might be like when considering what to do with such a fund:

The mission team considered moving Cassini to a more distant orbit, or sending it off to another planet. But then it came up with a proposal that would launch Cassini into one last flyby past Titan and use the moon’s pull to sling the craft into 22 close-in orbits of Saturn that would explore the gaps between the planet’s rings, then end by crashing into Saturn itself.

Read Crise’s piece below…

Via Bloomberg

This week has seen the demise of a prominent operator that provided plenty of fascinating and entertaining insights over the years but finally ran out of energy, ceasing operations in a blaze of glory. NASA’s Cassini satellite crashed into the surface of Saturn on Friday, bringing an end to a career spanning nearly two decades. Coincidentally, that description also fits a growing body of fund managers, with many blaming an “irrational market” for their performance woes. While just about anyone who’s ever taken risk has muttered “stupid market” from time to time, at the end of the day no single investor is bigger than the Street. Periodically, it’s important for investors to ask themselves: do you want to be right, or do you want to make money?

The Cassini mission was a scientific triumph, both in execution and results. While short-term trading is usually about feel and reading the pulse of the street, thematic investing brings to bear many of the components of the scientific method–doing background research, forming a hypothesis, conducting an experiment (via a position in the market), and evaluating the hypothesis in light of the experimental results

Of course, markets are not a laboratory environment, and Monte Carlo simulations are not the same as real-world P/L. Investors must confront a more limited experimental sample size than their scientific brethren, which can make it tricky to accurately evaluate an investment hypothesis

It is foolish to abandon a thematic view in the face of one or two pieces of adverse price action, which on a high-frequency basis usually represents noise. Unfortunately, many investors swing too far the other way, succumbing to confirmation bias and scouring the world for reasons reasons they are right rather than looking for reasons they may be wrong

When you see a 350-page slide deck justifying a losing position, it makes sense to wonder whether even a fraction of the effort that went into its creation was allocated to considering whether the investment thesis is misguided

While it’s human nature to blame market stupidity for one’s investment travails, doing so is rarely rewarding. You have to trade the market you’re in, not the market you’d like to be in. A fund manager’s ultimate goal is to make money for investors, not to have some grand thesis being proved correct. Those who forget this distinction too often may find themselves going the way of the Cassini probe

Writing about a subject is the best
way to educate yourself about it, and when I flick through past work I remember how much
they taught me, if no one else. Mainly they taught me that I didn’t know very much. But they
also taught me that most other people didn’t know much either. Thus, some key themes
which stand out include the illusory control of policy makers, the presumed knowledge of
those looking to them to actively do good, the ease with which we fool ourselves, and how
best to protect capital in the face of such unavoidable uncertainty. -- Dylan Grice